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The Role of the Central Bank

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The Role of the Central Bank
Role of A Central Bank as Lender of Last Resort

Introduction

Nowadays, monetary and central bank policy become more and more important. Besides, many references are regularly made to the function of central bank as lender of last resort(LOLR). LOLR contributes a lot to solve the financial crises. As central banks are independent from government, they seem to have strong priorities. In modern society, with the growth of the global economy, central banks have been playing especially important roles in finance systems of modern society(Goodhart& Illing,2002) . The main responsibility of a central bank is to manage the monetary policy in order to keep the economy as well as currency stable. Then, the central banks can manage inflation and deflation. Besides, central banks have to hold foreign exchange reserves. The role of central bank as lender of last resort plays a crucially important role in providing liquidity when financial situation depresses. However, this role suffers great controversy. In an attempt to have a further insight into the roles of central banks, the controversy of LOLR is introduced in this essay. It is vital to analyze this important central bank function in order to better understand this function of central banks. The purpose of this essay is to discuss the role of an LOLR and the controversy of the role(Freixas&Parigi, 2008).

The essay is structured as below. Section 2 discusses what is a central bank and its functions in the monetary and financial area. Section 3 introduces the role of the central bank as lender of last resort. Then, it is deeply discussed in section 4 that why LOLR is controversial. A conclusion of how the central banks will develop complete the essay.
2. Central Bank
2.1 Concept of The Central Bank
A central bank is a public institution that manages interest rates, the currency and money supply of a state. Central banks of their respective countries also usually supervise the system of commercial banking. A


References: Bagehot, W. (1873). Lombard Street: A Description of the Money Market. H.S. King, London. Freixas, X. and Parigi, B. (2008). Lender of Last Resort and Bank Closure Policy. CESifo Working Paper, n°2286. X. Freixas, B. M. Parigi and J.-C. Rochet. (2003). The lender of last resort: a 21st century approach. Goodhart, C. and G. Illing (2002) Introduction to Financial Crises, Contagion, and the Lender of Last Resort. A Reader, Goodhart and Illing (eds.). Oxford University Press, Oxford, 45-67. Repullo, R. (2000). Who Should act as a Lender of Last Resort? An Incomplete Contract model . Journal of Money, Credit and Banking, 32: 3, 580-605. Sveriges Riksbank. (2003). The Riksbank’s role as a lender of last resort. Financial Stability Review, No. 2, Stockholm, 203-213. Kahn, C. M. and J. A. C. Santos. (2001). Allocating bank regulatory powers: lender of last resort, deposit insurance and supervision ” Bank for International Settlements, WP n.102. Fettig, David (2002). Lender of More Than Last Resort. The Region, Federal Reserve Bank of Minneapolis, 56-64. Allen, William A. and Richhild Moessner. (2010). Central Bank Co-operation and International Liquidity in the Financial Crisis of 2008-9. Bank for International Settlements Working Papers No. 310, 15-23. Obstfeld, Maurice. (2009). Lenders of Last Resort and Global Liquidity: Rethinking the System. Development Outreach 11, 3, 1-4.
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